Treating home buyers as financial creditors may hurt funding

The 14-member panel headed by the corporate affairs ministry had suggested that home buyers be treated as financial creditors which will allow them to equitably participate in an insolvency resolution processSaloni Shukla | ET Bureau | May 14, 2018, 13:00 IST

The recommendation of the 14-member Insolvency and Bankruptcy Code panel to treat home buyers at par with financial creditors may hobble funding to the real estate sector. Experts warn that lenders would not only pull back on lending to the realty sector but it will also lead to delay in decision making in bankruptcy cases involving developers. “Home buyers as financial creditors is a ridiculous category; they (the panel) don’t understand the macro-level implication of this,” said Sumant Batra, managing partner at Kesar Dass, a law firm specialising in bankruptcies.

“If home buyers are going to sit on the table with lenders as CoC members, no lender would now fund real estate projects because they know that in an event of insolvency they won’t be in control.”

The 14-member panel headed by the corporate affairs ministry had suggested that home buyers be treated as financial creditors which will allow them to equitably participate in an insolvency resolution process. Three members on the panel — Shardul Shroff, Sudarshan Sen and B Sriram, MD, SBI had objected to this.

“It has been recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Supreme Court in ongoing cases,” the report said. “Classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code.”

The Supreme Court has been a saviour for home buyers in at least three cases that involved real estate bigwigs like Jaypee Associates, Unitech and the Amrapali Group. The apex court recently directed Jaiprakash Associates to deposit Rs100 crore with its Registry. Home buyers reached out to the Supreme Court saying 32,000 people had booked flats and paying equated monthly instalments towards the price of their homes.

The plea said hundreds of home buyers were left in the lurch after the NCLT admitted IDBI Bank’s plea to initiate insolvency proceedings against the debt-ridden realty company for defaulting on a Rs 526-crore loan on August 10 last year.

“You are only looking at the present situation, you have 10 real estate companies which are under distress, you have a good law in RERA to protect consumer interest and you can tide over the problem of NPA in this cycle,” said Kumar Saurabh Singh, partner at Khaitan & Co.

“But by bringing home buyers at par with lenders it’s an emotional decision because, going forward, lenders don’t know how much security gets diluted, so why will they lend to the real estate sector?”